Due Diligence Lite – a recipe for disaster

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What does it take to get a £120,000 per annum job as a managing director of an engineering company? Not much, it seems – simply submit a fictitious CV claiming to have a number of degrees you don’t have, and the job’s yours.

Or at least, that’s all it seems to have taken in the case of David Scott, who was jailed recently for 12 months for lying on his CV in order to gain the position of managing director of Mech-Tool, an engineering company whose website claims that they are the “leading global supplier” of heat and blast-protective equipment used within the oil and gas, nuclear, renewable energy, chemical and petrochemical industries.

The company has been in existence since 1969, and their most recent financial statements show an annual turnover of around £27.5 million. With around 200 employees, it is still small enough, and operating in a sufficiently specialised sphere, that one would expect any new potential employee to go through fairly rigorous screening to ensure not only that they have the necessary experience for the role, but also that they will fit in well with the existing workforce.

So what went wrong? Lying about one’s academic qualifications is one thing, but for such a senior role in such a specialised industry, surely one would be expected to have held similar roles previously? And be able to talk about those roles at interview stage?

The newspaper reporting makes no mention of Mr Scott having lied about previous work experience – but presumably he did. Which means that in addition to not checking his academic qualifications, nobody bothered to simply pick up the phone to his previous “employers” and verify that he had, in fact, held the positions he claimed to have held.

Furthermore, either he was hired entirely based on his CV, with no interview whatsoever, or he was able to convince the interviewer that he was capable of doing the job. I am unsure which of those possibilities horrifies me more – the idea of hiring a managing director based on neither interview nor recommendation, or the idea that the person conducting the interview had such poor interview skills, or such a poor understanding of the competencies required for the role, that they were unable to detect that he would be utterly incapable of doing the job.

It’s very hard, in the circumstances, to feel any sympathy for the company. Apparently within a few months it became clear that he was completely incapable of overseeing the two new multimillion-pound contracts in Kazakhstan for which he had been hired – it was only then that colleagues started to investigate his background and realised that it was entirely fictitious. He had, in fact, never been to university, never held an executive post and had simply picked up surveying experience while in the army, followed by sundry engineering jobs in the middle east.

Anybody who has ever worked in a large organization, with multiple layers of management, will have observed the Peter Principle in action – the tendency for people within an organization to rise to the level of their incompetence.   It’s an amusing description which allows those at more junior levels to laugh at the perceived incompetence of certain senior managers who appear to have been promoted beyond their abilities – and in most cases, there are sufficient numbers of competent people at the top to ensure that they are not given sole responsibility for anything that is business-critical.   But I think it’s worth examining one of the key underlying reasons that the Peter Principle exists.

It’s easy to test competence at a junior level. In any profession, there are basic skills and knowledge points that can be tested either via interview or through a written or practical exam. But as roles become more senior, the focus shifts from day-to-day hands-on knowledge and ability, to leadership, vision and strategy – not so easy to assess in an interview situation. Add to that the fact that due to the pyramid structure of any hierarchical organization, once somebody reaches the level of managing director, there will be very few other people at the same level who are able to assess whether the person will be capable of performing the role in question. It therefore becomes a case of promoting the person who has performed best within their current role, on the expectation that they may perform well in a more senior role. And praying that if they are not up to the job, those around them will step in and either provide support, or raise the alarm.

Thankfully at Mech-Tool, those working with David Scott did exactly that. But who among us will ever forget the disaster at the Royal Bank of Scotland, where nobody at a senior level had the courage or competence to question Fred Goodwin’s insistence that it was not necessary to do full due diligence on the takeover of ABN Amro, as Barclays, who had also been bidding to take over the Dutch bank, had already done it.  In his words, “due diligence lite” would be sufficient.  The irony, of course, is that Goodwin was not remotely incompetent – especially in the arena of due diligence, which was what had launched his career in banking when he worked as a chartered accountant at Touche Ross, performing due diligence on the National Australia Bank’s takeover of Clydesdale Bank, and again on its later takeover of Yorkshire Bank. He knew all about how to perform due diligence – he simply had become so arrogant and complacent over all his years of working on acquisitions, that he felt it was no longer necessary. And we all know how that turned out.

Mech-Tool, of course, didn’t simply promote David Scott beyond his abilities – they actually hired him specifically for the role. Which suggests a corollary to the Peter Principle, which I think I’ll call the Fred Principle: the tendency of those who have either been promoted beyond their abilities, or who have become arrogant and complacent on reaching the top, to make very poor hiring – and acquiring – decisions.   If Mech-Tool have not yet weeded out the Freds at the top of their organisation who were responsible for hiring David Scott without conducting due diligence, it’s high time they did. As Fred Goodwin proved, no company is too big, or too well-established, to fail. Mech-Tool escaped with mildly burned fingers on this occasion – they may not be so lucky again.

 

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One Response to Due Diligence Lite – a recipe for disaster

  1. kaprekar says:

    Lie like hell to get the job. Then display amazing incompetence when trying to deliver. Sounds a lot like Brexit headbangers. But at least they got to sack him.

    Like

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